Post-Brexit, Russia would make an interesting trade partner for Britain

The decision by Britain to exit the EU has thrown into doubt its future relations with Europe. That might create an opening for Russia to become a trusted trade partner.

Russian President Vladimir Putin, right, poses for a photo with Great Britain's Ambassador to Russia, Lawrence Bristow, during a receiving credentials ceremony on April 20, 2016. Pool photo via AP

The next few years will present an interesting challenge for the United Kingdom’s politicians and economic leaders. Despite the rhetoric, it is known that the EU will not make the country’s exit process and future trade negotiations an easy bargain. The main objective of Brussels will be to send a clear “threatening” message to any other country that might consider leaving the bloc in the near future.

Russia, which today is seen as an unlikely partner for the UK, due to the economic sanctions and its deteriorating relations with the West and NATO, has the potential to become an important asset during this transition period - not just as a trade partner but also as a bridge between East and West.

Moscow during the last few years has been significantly increasing its sphere of influence in Eurasia, and today it is seen as a close partner of China and India. Russia exercises its foreign policy to improve its image among other Eurasian countries and global emerging economies via the BRICS, which comprises the most important emerging markets in the world. This influence can potentially be used for the benefit of the UK, depending on its chosen approach towards Russia.

Russian imports from the UK grew 75 percent between 2009 and 2012. This positioned Russia right behind the U.S., China and the European Union among the UK’s top trade partners. This situation dramatically changed after 2014, with a deep slowdown of bilateral trade and a breakdown of the overall political relationship.

After the UK voted for Brexit, cities like Berlin, Amsterdam and Paris started posturing to take over London’s position as the financial center of Europe. They even campaigned to attract its startups with the guarantee to keep their access to the European common market. It is a fact that some companies could feel compelled to make this move if the negotiations with the EU start to become harsh in the first months after the triggering of Article 50 [which outlines the right of EU member states to withdraw from the EU – Editor’s Note].

In case the UK changes course rapidly and starts negotiations with Moscow, it could potentially provide the necessary counterbalance for these campaigns, showing the country’s ambition to open new trade routes and, at the same time, a new economic pragmatism. Both Russia and its main partners have the domestic consumer markets eager for the goods and agricultural products exported by the UK.

Before imposing the food embargo, 50 percent of Russian consumption of fish, milk, beef and cheese was previously dependent on imports. To put it in plain numbers, Greece alone used to export around 160,000 tons of fruits to Russia annually, worth $200 million. In a scenario in which the UK and Russia could agree to the lifting of sanctions between the two countries, Russia’s demand for agricultural products could potentially compensate any losses that the UK will probably have after the exit negotiations, due to the protectionist rules of the European Union’s farm lobby.

Additionally, British companies could find in Russia an attractive environment for new investments. British investors would be supporting the upgrade of Russia’s outdated manufacturing parks, building new logistics hubs and benefiting from the still highly educated and low-wage workers.

Compared with other emerging economies, there is a relatively low penetration of the banking sector in Russia and a great concentration of the market share with state-owned banks. Considering that financial services are a key part of UK exports (29 percent in 2012) and the potential impact on the sector due to the restricted access to the EU markets after Brexit, here lies another huge area of opportunity for cooperation.

Evaluating the factors of demand and supply under different scenarios, Russia is a fertile soil for the trade needs of the UK in the post-Brexit reality.

Politics runs in direct opposition to trade interests

The Russian ambassador to the UK, Alexander Yakovenko, recently toldInterfax that Moscow was hopeful that the change of the UK administration after Cameron’s resignation would create new opportunities for normalizing relations with Russia.

For now, those hopes show few signs of being realized. Theresa May, who is typically seen as pragmatic on foreign policy, made a clear statement about her current view on Russia in her article for the Daily Mail on July 4.

"We have all witnessed the renewed belligerence of Russia in recent years, most notoriously in the case of its illegal annexation of Crimea, and Vladimir Putin is intent upon upgrading Russia's nuclear forces. The Russian military has increased the number of nuclear exercises it conducts, while Putin threatens to base nuclear forces in Crimea and Kaliningrad, the Russian exclave on the Baltic Sea that neighbors Poland and Lithuania," she stated, affirming that the UK will remain working alongside its NATO allies.

Cameron’s recent decision to deploy British troops as part of a NATO contingent in the Baltic States and Poland certainly will not ease the political tensions with Moscow in the short term. However, considering that the very same countries are members of the EU, it is unclear if there will be any future opposition from Brussels to accept troops from a future non-EU country stationed on an EU member state’s territory.

What can change Britain’s policy towards Russia?

One wildcard in all this is Israel, which has quite a close relationship with Russia under Benjamin Netanyahu’s premiership. Israel is close to signing a free trade agreement with Moscow, and could become an important facilitator in relations between Russia and the UK, given its historically good ties with the United Kingdom.

The next U.S. president, to be known after the upcoming November presidential elections, will also greatly influence the future decisions of the UK political establishment towards Russia. Both candidates are clearly not pro-Russian, but a future Hillary Clinton administration would almost certainly act to escalate the anti-Russia sentiment among its allies and partners in Europe.

The current political panorama does not seem favorable for short-term active cooperation between London and Moscow although there is significant potential to develop economic and trade ties. This scenario can be radically changed depending on the EU’s willingness to inflict economic damage on the UK during the Article 50 negotiations, as well as how the pragmatic Theresa May will evaluate the UK’s options to establish new bridges with new partners.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.